Chairman and CEO J.T. Battenberg III said he will retire this year, an announcement that came a week earlier than Dawes' resignation. The company said the two moves are not related, and Battenberg remains CEO while a successor is found. Dawes resigned Friday, effective immediately, and John Sheehan, the company's chief accounting officer, is interim CFO.
The new CEO and CFO will have to quickly deal with deteriorating volume in North America, the accounting investigation, huge pension and health care liabilities, unprecedented raw material costs, and high labor costs with a unionized work force.
A U.S. Securities and Exchange Commission investigation that turned up improper accounting for vendor rebates has widened to include an internal investigation of how Delphi accounted for $271 million in cash rebates to General Motors as part of its separation agreement. Delphi spun off from GM in 1999.
In essence, Delphi accounted for the rebates all at once, instead of spreading them out over the life of the contract. That caused a cash flow from operations overstatement of $200 million in 2000 and a $61 million overstatement of pretax income in 2001.
The board's audit committee, headed by Eastman Kodak Co. CFO Robert Brust, lost confidence in Dawes and asked him to resign. Also resigning was Paul Free, Delphi's former chief accountant and controller. John Blahnik, vice president of treasury, mergers and acquisitions and new markets, has been reassigned to a nonofficer position.
The moves caused worry among the Wall Street analysts who cover Delphi's stock. Delphi is dealing with declining volume from its largest customer, GM, a massive pension obligation that will eat up $600 million in cash this year, ongoing plant closings and job cuts and a likely violation of its bank covenants this year, according to stock reports last week. Delphi's pension plan was underfunded by $4.3 billion as of Dec. 31.
"In a talent-poor industry, the world's largest auto supplier needs not one, but two senior executives," wrote UBS Investment Research analyst Rob Hinchliffe in a March 4 report.
Two analysts MorganStanley's Stephen Girsky and Caylon Securities' Joseph Amaturo said Delphi's 28 cents a share dividend is at risk.
Others see Dawes' departure and Battenberg's retirement as signs that the investigation will uncover more problems. Though Delphi plans to restate earnings for 2001 and possibly other periods, the amounts are small compared with the company's $28.7 billion in 2004 revenue.
But the number of errors and the fact that Dawes was asked to resign suggest "there may be another shoe to drop," according to the UBS report.
The hot-button issue with boards is internal controls, and Delphi's accounting irregularities seem to suggest a problem with that, said Nell Minow, editor of The Corporate Library, a corporate governance watchdog.
"It's not a lot in magnitude but it seems to be structural," she said. "It's not a math error. It's a series of judgment calls that were made."
The board is likely to take a deep, wide-ranging look at accounting practices, Minow said.
The losses at the top also could affect Delphi's ability to work with the United Auto Workers union on labor costs, analysts said. Delphi reached a two-tier wage agreement with the UAW last year.
It's critical for Delphi to retire or send back to GM its older, high-wage employees to make room for new employees who make less, wrote Banc of America Securities auto analyst Ronald Tadross.
He estimates Delphi's high-wage workforce causes a $1.50 a share drag on earnings.
"We do not have special insight into these issues, but think they could make Delphi's 30,000 high-wage UAW employees more skeptical of management and less cooperative," Tadross wrote in a March 4 report. "Delphi needs to accelerate the reduction of these people."